Is your store experiencing resounding success? Are your products flying off of store shelves? Have a hard time staying on top of your inventory management? You might just need some safety stock.
While having extra stock lying around your warehouse sound suspiciously close to dead stock, being able to forecast demand having enough inventory to meet your customer’s expectations can reduce customer turnover and improve the management of your supply chain.
It sounds counterintuitive, but this so-called ‘safety stock’ could mean the difference between meeting customer demand and failing to make customers happy.
If unpredictable demand surges, stock-outs and lead time uncertainty scare you, here’s what you need to know about safety stock and how to manage your safety stock levels to meet your customers’ demands.
What is safety stock?
Safety stock, also known as buffer stock or buffer inventory, is any additional product stock reserved to prevent stock-outs and out-of-stock situations.
Despite our best-laid plans, supply chain problems happen. Even if you have the most reliable supply chain, cyclical shopping cycles, consumer holidays and unpredictable events can cause demand to surge unexpectedly.
If your in-demand products are out of stock, what’s stopping your customers from switching to a different retailer or business to get what they need?
Owners of ecommerce websites and platforms can attest to high shopping cart abandonment rates that are already endemic within the world of digital commerce.
While back-ordering is another option, it likely won’t be enough to spur customers to stay and wait, especially when the need for instant gratification and same-day delivery is so high.
Why is safety stock important?
Safety stock removes the possibility of your fast-moving inventory running out of stock. A strategic safety stock level can lower your dependence on suppliers while also protecting against unexpected delays in the supply chain.
Calculating safety stock helps keep your business running even in the face of supply fluctuations and disruptions.
Here are a few more reasons why you should consider safety stock for your business:
Protection against demand fluctuations
Despite your best market and demand forecasting, there can always be sudden and unexpected demand surges that can lead to depleted inventory well ahead of your supplier lead time. If it’s a busy holiday season, having extra stock can help you maintain your fulfillment experience.
Having more safety stock can help you meet uncertainty on-demand without being suffering from long lead times.
Safety stock can also help you reconcile the differences between your average demand and lead time by increasing the availability of fast-moving products.
Buffer against long supplier lead times
Even the most robust supply chains can be susceptible to disruptions. The COVID-19 pandemic has, among other things, completely upended multiple supply chains across multiple industries.
Lee Valley, an Ottawa-based home and garden retailer, has warned that they “could be out of stock for more than a year” on certain products.
While no level of safety stock could protect or predict such volatility, the supply crunch caused by other, more minor global incidences and even freak weather events can leave your business in the dark for weeks or even months if you don’t have any safety stock prepared.
Protection against price changes
Demand variability can dictate the supply and demand of materials and the products that depend on them. Such sudden fluctuations can have a heavy impact on the price cost of your business’s goods and services.
For example, COVID-19’s effect on the automobile supply chain has led to massive automobile chip shortages throughout 2021, with its effects forecasted to last well into 2022. Car prices have risen by orders of magnitude due to a lack of raw materials, and it’s still not sure exactly when prices will return to normal.
Again, while the safety stock required to protect against such a significant, industry-level disruption would be almost impossible to procure, it’s hard to argue against the fact that the companies that had some level of safety stock available are more capable of maintaining their production without cutting into their finances as opposed to organizations that don’t.
How to calculate safety stock
Safety stock can help protect your business against uncertainty but calculating it isn’t as simple or as straightforward as you might think.
After all, having extra inventory without knowing the exact amount you’ll need or long it’ll take to move it can lead to warehouse and inventory costs.
Your safety stock inventory has to be in tune with your product’s expected demand, your supplier’s average lead time, and a host of other factors.
Many formulas are available that account for factors such as your reorder point, your dependent lead time, and your lead time deviation. However, if you’re just getting your feet wet, a general calculation will more than suffice.
While there is no one-size-fits-all solution for determining safety stock, there are a variety of stock formulas you can use to get an idea of your safety stock requirements.
Three safety stock formulas
General safety stock equation
The most basic safety stock formula factors in four elements. Here’s what it looks like:
Safety stock = (maximum daily usage x maximum lead time in days) – (average daily usage x average lead time in days)
Your safety stock calculations will vary depending on the maximum number of product units you sell in a day and the lead time of your vendor.
Heizer and Render’s equation
Heizer and Render’s variation on the formula works best when there are vendor-side supply deviations. This formula utilizes the standard deviation of lead time distribution to better predict your lead time and how often you’ll have to deal with late shipments. However, this equation won’t account for changes in actual demand.
Safety stock = Z * 𝜎𝑑𝐿𝑇
The ‘Z’ factor in this equation is your desired service factor, or how confident you want to be with your amount of safety stock. The higher the score, the less likely you’ll run out of stock.
The standard deviation in lead time, represented by ‘𝜎𝑑𝐿𝑇,’ means how often and by how much the average lead time differs from the actual lead time.
Greasley's formula
Greasley’s variation on the formula accounts for both lead time and demand fluctuations, but not stock that’s ready for distribution.
Safety stock = 𝜎𝐿𝑇 * Davg * Z
Greasley’s formula multiples the average demand (Davg) with your desired service factor (z) and the standard deviation in lead time (𝜎𝐿𝑇). To figure out your safety stock using this equation, you’ll need to calculate your products’ average demand per day over a fixed period.
Is there a way to automate stock management?
Managing a store or business’ stock can be a full-time job in and of itself, which is why Inventory Managers play such a critical role in supply chain management.
Excellent warehouse management can lower your carrying costs, decrease lead time variability and reduce lost sales. However, most SMEs won’t have the capital to fill the role full-time, which is where inventory management software comes in.
Inventory Management Software provides business owners with the tools they need to stay on top of their inventory without breaking the bank.
Such software can also help them determine how much safety stock they’ll need to have on hand, as well as the average move rates of their best-selling products.
The best management software will also recommend reorder points for maximum efficiency – without requiring you to do any safety stock calculation or use any safety stock formula.
From helping you automate your order processing and offering your customers same-day delivery to providing multiple fulfillment options to your customers through dark stores, Breadstack is your holistic online and offline delivery solution.
Sign up for free today and integrate our platform with your online store or POS devices in minutes – all without the need for an IT team.
